What Type of Entity Should You Form?
Some of the most frequent questions that we receive from clients revolve around entity selection for conducting different types of businesses. One aspect involves governance and authority. The issue of governance and authority is important because it determines who has the legal authority to bind the company to contracts and to act on behalf of the company.
The three most popular types of entities are corporations, limited liability companies, and limited partnerships. There are others, however, that might be better suited to your needs.
Corporations have a three-tier structure:
1.shareholders, who are the owners;
2.the board of directors, who are elected by the shareholders and oversee the overall direction of the company; and
3.the officers, who are appointed by the board of directors and manage the day-to-day affairs of the
Under Nevada law, a corporation must have at least one director and the following three officer positions: (1) president, (2) secretary, and (3) treasurer.
Limited Liability Companies
Limited liability companies can be either manager-managed or member-managed.
Members are the owners of the company, much like shareholders in a corporation.
Managers may be members or not.
As to multiple-member companies, we generally recommend that the LLC be manager-managed for the following reasons, among others:
1.Additional members can be added in the future without changing management;
2.Members’ interests can be held in trusts for estate planning purposes; and
3.If desired, a corporation could be established as the manager of the company for tax and liability reasons.
Limited partnerships must have at least one general partner and at least one limited partner. The general partners and the limited partners are owners in the limited partnership.
Limited partnerships have fallen somewhat out of favor because the general partner has unlimited personal liability. Therefore, in order to have the most asset protection in a limited partnership, it is recommended that a separate entity (typically, a corporation) be formed to hold the general partnership interest.
There are many other tax considerations and operational considerations when choosing an entity, however, understanding the basic framework may help you decide which form of entity would best suit your business needs. Please remember that tax election with the IRS is a different issue than entity selection under state law.
By: Guest Blogger Mary J. Drury, Esq.